Stimulus

Federal Reserve Chairman Ben Bernanke held a news conference on June 22nd shortly after 2 pm, following the Fed’s policy meeting. As usual, the market vividly showed it’s opinion of Mr. Bernanke’s comments:

Oh Ben. In fairness, there hasn’t been a heck of a lot of happy news for him to share. Nevertheless, why can’t an aide of Ben Bernanke’s set his watch 2 hours behind so that he delivers his comments after the market closes?

Ben spoke to several salient points. Let’s take a deep dive into each:

Inflation: “I have been a longtime proponent of an inflation target…[snip] There’s nothing imminent, but again we will continue to discuss this and as appropriate we will be consulting about it.”

Interest rates have been kept extremely low for several years now to not only enable banks to lend to each other cheaply, but to also encourage growth in the stock market (and as a side effect, business growth). Nevertheless, it’s been unnatural to keep interests rates low for such an extended period of time. So whether it’s irrational or not, many are concerned over what may happen to the inflation rate and economic growth once the Fed beings to raise rates again. The market doesn’t like uncertainty over inflation, so -1 for Ben.

The Pace of Economic Growth: “Part of the slowdown is temporary and part of it may be longer-lasting. We do believe that growth is going to pick up into 2012 but at a somewhat slower pace from what we had anticipated in April. We don’t have a precise read on why this slower pace of growth is persisting.”

I do, and so does most of America: jobs. Or even more accurately: household debt, which keeps consumers from spending, which keeps businesses from hiring because the demand isn’t there. I agree to expect growth in the latter half of 2012 — in particular, since banks appear to be using IPO’s to make money this year which may help discourage a double dip this year. Nevertheless, institutional investments may not have the power to keep the market growing. It’s steady investments by individuals over the long term, yet individuals are increasingly lacking the money to invest. -1 for Ben.

The Labor Market: “As of last August…inflation was low and falling, and unemployment looked like it might be even beginning to rise again. [snip] I think we are in a different position today, certainly not where we would like to be but closer to the dual mandate objectives than we were at that time.”

The Fed started talking about QE2 in August 2010, and implemented that strategy by buying assets (government debt, mortgages, commercial loans, etc.) a few months later. Last August in terms of jobs was more bleak than this August may be. So while it’s frustrating and demoralizing to many Americans to not be able to find a job nor to be able to afford to train themselves for a job in a new industry, and while job growth is slower than many feel it would be than if the issue of household debt were directly addressed, prospects are better than last year. +1 for Ben.

On QE3: “With respect to additional asset purchases, we haven’t taken any action, obviously, today. [snip] I think the point I would make, though, in terms of where we are today versus where we were in August of last year when I began to talk about asset purchases is that at that time…many objective indicators suggested that deflation was a nontrivial risk and I think that (QE2) has been very successful in eliminating deflation risks.”

I would agree that the cash infusion helped ward off deflation, yet was a very nonsensical policy to hardworking individuals who watched banks’ coffers fill with cash. Deflation during a period like this is like putting a nail in the coffin when it comes to job creation. Deflation is usually associated with a decrease in prices, and if companies aren’t earning what they used to from consumer purchases they certainly won’t hire additional staff (nor be able to provide pay raises). While deflation pressures subsided, it may have been sensible at that time to direct part of QE2 to Main Street to purchase debt on household books as well. So Ben is even here.

The Greek Crisis: “(The Federal Reserve) did discuss it, and it is one of several potential financial risks that we are facing now.”

We’re going to witness more crises in the future as municipalities run out of money. So it’s smart for Ben to monitor the situation in Greece, yet not overreact. So +1 for Ben.

The Slow Recovery: “The reduced pace of the recovery partly reflects factors that are likely to be temporary. In particular, consumers’ purchasing power has been damaged by higher food and energy prices and the aftermath of the tragic earthquake and tsunami in Japan has been associated with disruptions in local supply chains, especially in the auto sector. However some moderation in gasoline prices is now a prospect and the effects of the Japanese disaster and manufacturing output are likely to dissipate in coming months. Consequently…the committee expects that the pace of economic recovery will pick up overcoming quarters.”

I think that Ben started to grow weary at this point and could have used a shot of espresso. This quote reiterates clearly than Ben Bernanke thinks more like an economist than someone with down home common sense. Consumer purchasing power has been damaged, but it’s not as correlated to higher food and energy prices as it is to household debt caused by decreasing wages and the lack of jobs. I think Mr. Bernanke is a smart and thoughtful person, but desperately needs an Elizabeth Warren or even a real business owner in his orbit versus textbooks and other economists. -1 for Ben.

It’s not easy to right a ship that exploded just over 3 years ago, but the right words would have made a much better effect on confidence. While I feel he and the Fed have done a good job in preventing deflation and an unemployment spiral, it’s clear that the administration needs fresh perspectives to help spur the country into a new phase of real growth fueled by middle class jobs and individual investors.

Confidence data is used as an indicator to predict future commerce. For example, if you’re confident that your personal financial situation will improve tomorrow you may feel encouraged to spend today.

In the confidence game, who is coming out on top: Consumers or Businesses?

Contrary to popular belief, business and consumer confidence levels are at approximately the same level today. However, you can see that consumers are coming off of an extreme high which may be why the current consumer confidence levels feel shockingly low. It’s the same feeling you had at 6 years old when your parents made you leave Splash Mountain to spend the afternoon in the Epcot center.

Nevertheless, the drop may be positively contributing to higher rates of saving and decreasing debt rates occurring among consumers. So while lower confidence levels may not be helping our economy grow, they are helping households rebalance out of the red and into the black.

If you had money invested during the financial crisis that began in 2007, you may still be recovering from the bungee jump you may have experienced in the global financial markets largely brought about by the unwinding of complex securities held by a handful of large banks.

The crisis also shined a spotlight on the fact that several banks were operating in gray areas — for example, selling clients investments via one department that the bank itself was betting against in another department. Or that banks had the ability to profit from trades placed with deposits from their clients.

To enable better oversight and ideally prevent these types of events from happening again, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“The Act”) into law in July 2010.

It’s a wide-sweeping law seeking to prevent “too big to fail” scenarios as well as to protect consumers from predatory practices. It’s so sweeping that one has to ask if there’s any way this Act could fail?

So far, The Act is actually causing an impact with provisions that aim to put a roach motel in every corner of the room. Let’s look at proprietary trading as an example.

Proprietary trading desks at banks previously could have made highly speculative bets with client deposits, and it didn’t matter if the bets were in line with or against positions that the banks knew their clients held.

The Act — with help from the Volcker Rule — tamped down on these activities. As a result, we began to see proprietary trading desks shutter and traders teaming together to form independent hedge funds which in the past have had less oversight than other Wall Street entities.

But in a brilliant move, The Act also requires that hedge funds now explicitly document, retain and report to the SEC what bets they’re making. Hedge funds must now make quarterly to annual regulatory filings that outline the geographic exposures, counterparties and extent of leverage in their positions. The only thing left in my opinion is standardizing how each item is reported so that the SEC is comparing apples to apples.

The jury is still out on whether The Act will ultimately create transparency for the good of investors and consumers, or if The Act will cause more obscure techniques to be created for banks to make profits. The former may actually cause Wall Street to shrink for the good if bankers leave being unable to create alpha like in days past, but the latter could cause another bubble in 3-5 years.

Or perhaps we’ll see another HBO movie in a few years also called “Too Big to Fail” but this time starring Senators Dodd and Frank, and Volcker. I’ll be watching this story unfold.

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About The Wall Street Geek

After turning $1100 into $7015 in the stock market right out of college, the author of "The Wall Street Geek" worked for 15 years on Wall Street. In this investment blog, she gives investment tips and insights to help everyday investors be successful. Read More >>

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